Current Account


DEFINITION of 'Current Account'

The difference between a nation’s savings and its investment. The current account is an important indicator about an economy's health. It is defined as the sum of the balance of trade (goods and services exports less imports), net income from abroad and net current transfers. A positive current account balance indicates that the nation is a net lender to the rest of the world, while a negative current account balance indicates that it is a net borrower from the rest of the world. A current account surplus increases a nation’s net foreign assets by the amount of the surplus, and a current account deficit decreases it by that amount. The current account and the capital account are the two main components of a nation’s balance of payments.


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BREAKING DOWN 'Current Account'

A nation’s current account balance is influenced by numerous factors – its trade policies, exchange rate, competitiveness, forex reserves, inflation rate and others.

Since the trade balance (exports minus imports) is generally the biggest determinant of the current account surplus or deficit, the current account balance often displays a cyclical trend. During a strong economic expansion, import volumes typically surge; if exports are unable to grow at the same rate, the current account deficit will widen. Conversely, during a recession, the current account deficit will shrink if imports decline and exports increase to stronger economies.

The currency exchange rate exerts a significant influence on the trade balance, and by extension, on the current account. An overvalued currency makes imports cheaper and exports less competitive, thereby widening the current account deficit (or narrowing the surplus). An undervalued currency, on the other hand, boosts exports and makes imports more expensive, thus increasing the current account surplus (or narrowing the deficit).

Nations with chronic current account deficits often come under increased investor scrutiny during periods of heightened uncertainty. The currencies of such nations often come under speculative attack during such times. This creates a vicious circle where precious foreign exchange reserves are depleted to support the domestic currency, and this forex reserve depletion - combined with a deteriorating trade balance - puts further pressure on the currency. Embattled nations are often forced to take stringent measures to support the currency, such as raising interest rates and curbing currency outflows.

Delve deeper into this major economic term by reading Exploring The Current Account In The Balance Of Payments.

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  1. What does a positive capital account balance mean?

    A positive capital account balance indicates that more money is flowing into, rather than out of, a country. A country's ... Read Full Answer >>
  2. How does a capital account illustrate the strength of investment markets for a country?

    A nation's capital account can be a major indicator of how much interest the nation generates among foreign investors. A ... Read Full Answer >>
  3. What does it mean when a country has little activity in its capital account?

    Since a country's capital account represents money flow into the country through foreign investment, having only a small ... Read Full Answer >>
  4. What's does the current account have to do with the trade balance?

    A nation's current account is a measure of its international trade status. A large portion of that number is the country's ... Read Full Answer >>
  5. Why do some analysts argue that trade deficits aren't bad for the economy?

    A country's balance of trade and its current accounts are economic metrics that gauge the relationship between how much the ... Read Full Answer >>
  6. What country holds the largest negative current account in the world?

    The country that holds the largest negative current account is the United States. According to the CIA's World Factbook, ... Read Full Answer >>
  7. What is a trade deficit and what effect will it have on the stock market?

    A trade deficit, which is also referred to as net exports, is an economic condition that occurs when a country is importing ... Read Full Answer >>

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